Euro-zone finance ministers: Spain has an extra year to bring its budget deficit under control

Germany's Constitutional Court is hearing testimony related to several lawsuits seeking an injunction to delay the launch of the euro-zone's 500 billion ($615.7 billion) European Stability Mechanism until the court has determined whether German legislation ratifying the bailout fund and the fiscal pact are constitutional. Mr. Schuble, arguing on behalf of the government, said any further delay in launching the ESM could add to uncertainty in financial markets about Europe's ability to stem the euro-zone debt crisis. Euro-zone finance ministers gave Spain an extra year to bring its budget deficit back in line with the bloc's rules and promised a 30 billion bailout fund for banks would be available by the end of July. WSJ's Terry Roth discusses. "A considerable delay of the ESM could mean further insecurity on markets, and a loss of confidence in the euro-zone," Mr. Schuble told the court, warning that delay could exacerbate the problems of weak euro-zone members and therefore pose "unforeseeable dangers" to the German economy. If the injunction against implementation of the ESM is granted, it would be valid for up to six months, Andreas Vosskuhle, president of the court said at the opening of the proceedings, adding that a final decision on the constitutionality of the ESM could be made by the end of the year. "It is apparent that coming to a decision is not going to be easy for many reasons," Mr. Vosskuhle told the court. "The court will nevertheless resist the temptation to allow itself to be led to one side or the other by emotions and instead will decide on the petitions with both feet firmly rooted in the constitution." Germany's parliament ratified legislation creating the ESM on June 29 with an overwhelming majority of votes from parties in Chancellor Angela Merkel's center-right coalition and the left-leaning main opposition parties. The ESM, which was initially expected to replace the temporary bailout fund, the European Financial Stability Facility, on July 9 cannot go into operation until all EU countries ratify the ESM treaty. German euro-critics filed petitions with the Constitutional Court immediately after parliament's ratification of the ESM in an attempt to persuade the court to block the

bailout fund from taking up its activities until a final ruling is made. One of the petitions was launched by a group of academics led by Peter Gauweiler, a former Bavarian politician who has long opposed the euro currency. Another petition was filed by Herta Dubler-Gmelin, a Social Democrat and former justice minister, on behalf of 12,000 German citizens. The ESM and the 440-billion EFSF together constitute the euro-zone's firewall against the spread of financial contagion. The bailout funds provide loans to struggling eurozone governments to finance their budgets and provide aid for governments to refinance weakened banks. The fiscal pact is at aimed at increasing European enforcement of budget discipline in the 17 countries that use the euro currency. The plaintiffs argue that ratification of the ESM and the fiscal pact are unconstitutional because they force parliament to give up too much control of the federal budget. The court is expected to hear testimony, including expert testimony from Jens Weidmann, president of the Deutsche Bundesbank, Germany's powerful central bank. The court isn't expected to make a ruling on the injunction against the ESM. Spanish borrowing costs have climbed lately Madrid was given until 2014 instead of 2013 to cut its government deficit to below 3% of gross domestic product. Tweaking Spain's budget targets would let Madrid run a deficit of as much as 6.3% of gross domestic product this year, instead of 5.3%, without risking financial penalties, according to a draft statement reviewed by The Wall Street Journal. The 2013 deficit target would be 4.5% of GDP and the 2014 goal would be 2.8%. Many economists have feared that cutting public spending too quickly could push Spain even deeper into recession, just as it scrambles to deal with massive problems in its banking sector. But Madrid and some other euro countries worry that letting go of the ambitious budget targets could drive the country's funding costs even higher. Finance ministers also moved closer to finalizing the conditions Spain must meet to get as much as 100 billion ($123 billion) from the euro zone to recapitalize local banks reeling from the real-estate meltdown in the country. Ministers agreed the bailout funds would ready 30 billion by the end of this month in case any banks needed to be recapitalized urgently. However, the final size of the bailout request may not be settled until September, after a detailed review of bank asset quality and individual bank stress tests had been completed. Thomas Wieser, who chairs meetings of senior euro-zone officials, said Spanish banks would transfer loans to an "asset management company." Spain's government has long resisted calls to set up such a single "bad bank"preferring to create smaller bad banks tied to each individual lenderclaiming a sector-wide arrangement would reward the weakest banks. Mr. Wieser said that asset sales from the company would go toward early repayment of the loans from the bailout funds.

German finance minister Wolfgang Schuble said there would be strong regulations of salaries for managers of banks that receive state support. Spanish borrowing costs have climbed recently, partly due to uncertainty over the way it will ultimately receive aid for its banks. At the moment, the euro zone's bailout funds can lend money only to governments, which means the support for banks will drive up Spain's debt levels. The ministers also asked Luxembourg Prime Minister Jean-Claude Juncker to continue chairing their regular meetings and nominated Luxembourg Central Bank Governor Yves Mersch to a seat on the European Central Bank's powerful six-member executive board. In addition to that, the ministers asked Klaus Regling, the managing director of their current bailout fund, the European Financial Stability Facility, to also head its successor, the European Stability Mechanism once it comes into operation later this summer.
Date: july 11. 2012

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